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Market Watch: October 28, 2022

Oct 28, 2022 | 1:36 PM

Big Picture

Earnings Take Centre Stage as Investors Try to Gauge Economy’s Health

U.S. stocks posted solid gains on Monday as investors looked ahead to a busy week of earnings results, including key names like Apple, Amazon and Google parent Alphabet. By Monday’s close, the Dow had surged more than 400 points, while the S&P 500 and Nasdaq rose 44 and 93 points, respectively. The TSX also ended the day higher, but gains were tempered by sharp losses in copper prices.

U.S. stock indexes rose again on Tuesday, propelled by better-than-expected earnings and tumbling bond yields, which fell in response to data showing U.S. home-price growth had slowed sharply. Tuesday’s rally sent the Dow to a six-week high, while the interest-rate-sensitive Nasdaq also had a strong showing. In Canada, the TSX rose 179 points, buoyed by shares of cannabis producers, including Canopy Growth Corp., which jumped more than 25 per cent Tuesday.

The Bank of Canada (BoC) on Wednesday increased its benchmark interest rate by 50 basis points, moving the policy rate up to 3.75 per cent for the first time since early 2008. Financial markets had been anticipating a larger hike of 75 basis points. In the U.S., falling tech stocks dragged the Nasdaq and S&P 500 lower Wednesday after disappointing earnings reports from Google parent company Alphabet and Microsoft. Although the Dow finished flat, the S&P 500 lost 28 points, while the Nasdaq surrendered 228 points, or 2 per cent. In Canada, the TSX rallied in light of the BoC’s smallerthan-expected rate hike.

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U.S. stocks were mixed on Thursday, driven by continued uncertainty about the pace of interest rates and a new batch of corporate earnings. The latest GDP data showed that the U.S. economy grew at a 2.6 per cent annual rate last quarter, the most recent sign that the economy is doing better than many had forecast. Fresh data also showed that the jobs market is holding up well. However, there continue to be disappointing earnings from key tech names like Facebook parent Meta Platforms, which fell 24 per cent in afternoon trading after announcing disappointing results after Wednesday’s close. In Canada, the TSX rose 72 points to cap off a strong week.

Dow, S&P 500 and TSX Register Gains; Nasdaq Drifts Lower

For the four trading days covered in this report, the Dow rose 951 points to close at 32,033, the S&P 500 added 54 points to settle at 3,807, while the tech-heavy Nasdaq dropped 68 points to close at 10,792. In Canada, the TSX jumped 491 points to end at 19,352.

Strategy

BoC opts for a smaller than expected rate hike amid recession fears

The Bank of Canada (BoC) raised policy rates by 50 bps on Wednesday, less than consensus forecasts of 75 bps. In its statement, the Bank said that CPI has declined from 8.1 per cent to 6.9 per cent in the last three months, primarily due to falling gasoline prices. That said, it expressed concerns about the breadth of inflation, citing that two-thirds of the CPI basket has grown 5 per cent year-over-year. Core inflation is also elevated. The BoC acknowledged that the effects of recent policy rate increases are becoming evident in interest rate sensitive sectors as housing activity has retreated sharply and household/business spending is softening. Intensifying global recession fears have also led to a slowdown in demand, which is weighing on exports. As such, the Bank has lowered its growth forecast for the current year to 3.3 per cent from 3.5 per cent previously. Growth forecasts for 2023 have been halved to 0.9 per cent from 1.8 per cent previously while 2024 has been reduced to 2.0 per cent from 2.4 per cent.

In the accompanying Monetary Policy Report, the BoC hinted at the possibility of a technical recession, saying that “a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.” Ultimately, the Bank expects higher interest rates to translate into lower inflation. It forecasts CPI to retreat to 3 per cent by the end of 2023 before returning to the 2 per cent target in 2024. The BoC now joins the Reserve Bank of Australia in downshifting to a slower pace of rate hikes. Both countries have excessively indebted households that are significantly impacted by higher borrowing costs. That said, it is moving into a slower pace of rate hikes compared to the Fed, which is expected to hike by 75 bps next week.

Disclaimer

This report is provided to you for informational purposes only and is not intended to provide personal investment advice. This report does not include or constitute an investment recommendation and does not take into account the particular investment objectives, financial conditions, or specific needs of individual clients. Any statements regarding future prospects may not be realized. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor.

The author(s) of the report and the supervisors of the Global Portfolio Advisory Group may own securities of the companies included herein.

Scotia Capital Inc. is what is referred to as an “integrated” investment firm since we provide a broad range of corporate finance, investment banking, institutional trading and retail client services and products. As a result, we recognize that there are inherent conflicts of interest in our business since we often represent both sides to a transaction, namely the buyer and the seller. While we have policies and procedures in place to manage these conflicts, we also disclose certain conflicts to you so that you are aware of them. Please note that we may have, from time to time, relationships with the companies that are discussed in this report.

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